Carnival 2007 Q2 Earnings

Details

June 20, 2007

Carnival Corporation reported net income of $390 million, or $0.48 per share, on revenues of $2. 9 billion for its second quarter ended May 31, 2007, compared to net income of $380 million, or $0.46, on revenues of$2.6 million for its second quarter last year.

Carnival also revised its earnings forecast for the year to $2.85 to $2.95 per share from its previous guidance of$2.90 to $3.10.

Trends

Speaking on the company's Q2 earnings call, CEO and Chairman Micky Arison, said that the long term strategy is to modernize and to move out ships and brands that do not fit. This spring, Carnival sold Swan Hellenic Cruises and Windstar Cruises, as well as the Pacific Star, and more recently the OE2.

Arison also announced a change of plans for Carnival's joint venture with Germany's TUI . He said that because of delays in the German authorities' approval process for the venture, the previously announced newbuilding slot for TUI, with 2010, delivery has been lost. Instead, an existing company ship will be transferred to TUI Cruises in 2009.

In addition, Carnival plans to transfer two other existing ships to its joint venture with Iberojet. Both joint ventures are expected to be completed as early as Q3 and not later than Q4.

More capacity is also being moved to more lucrative itineraries. For 2008, fleet-wide capacity in the Caribbean will be 36 percent compared to 40 percent in 2007.

Said Vice Chairman and COO Howard Frank: "We are reducing our exposure to the Caribbean trade which has been challenging in recent years."

For Carnival's North American brands, Caribbean capacity will be reduced to 47 percent in 2008, compared to 52 percent in 2007.

More ships are also being built for the European brands which will represent 3 8 percent of the fleet-wide capacity by 2010, compared to 32 percent today, according to Frank.

For 2008, fleet-wide capacity will be up 8 percent, with a 5 percent increase in North America and a 15 percent increase in Europe.

Fleet-wide capacity will continue to grow at a rate of 5.5 percent in 2009 and 6.7 percent in 2010, according to Carnival.

Arison said that the building rate will moderate beyond 2010, while he "is continuing to talk to yards." He partially attributed the moderation to lack of building slots and higher prices. His strategy is to have projects that meet certain return hurdles. A disciplined approach to growing the business calls for investments in product (ships) that produce reasonable returns, Arison said.

Q2 Comments

According to Gary Cahill, executive vice president and CFO, Q2 earnings were in line with expectations. He said that the pricing pressure in the Caribbean continued from Q 1, although it started to moderate in May, while Europe continued to experience strength.

Q2 capacity was up 9.2 percent over the same period last year.

Net ticket revenue yield was down year-over-year in North America, while onboard revenue yield was up, according to Cahill, but not as much as before.

In Europe, both ticket and onboard yields were up.

China, however, continues to produce weak returns.

On the cost side, Cahill said that unit costs were flat year-over-year without fuel.

Q3 and Q4

Carnival's guidance for Q3 is from $1.60 to $1.62 per share, compared to the consensus estimate of $1.66.

Based on its year-end guidance, the earnings for Q4 would be $0.48, compared to the consensus of $0.53.

Fleet-wide, occupancy is up for Q3, according to Frank, but pricing is down.

He said that Europe is strong with pricing ahead of last year and very little inventory left to sell, and that Alaska is strong.

Frank said that pricing is picking up in North America for the second half of 2007. With less inventory left to sell in the Caribbean, he expects better pricing there too.

Among the European brands, Frank pointed out that for Costa Crociere occupancy is up but pricing is down from last year, which he attributed a very strong Q3 in 2006 and a 24 percent capacity increase this year.

China is starting to show some improvement, according to Frank, who attributed that largely to longer cruises being sold to a mix of European and American passengers at good rates.

The longer cruises are being offered when the Chinese typically do not cruise, he explained.

"It looks like we will have to build the market slower than we thought," Frank said. "We still think that long-term China is a good strategy. In a year or two when all goes well we will increase our capacity there."

For Q4, overall occupancy was reported to be up 4 points with pricing flat year-over-year.

The North American brands will have 45 percent of their capacity in the Caribbean, compared to 50 percent last year; 9 percent in Alaska, compared to 8 percent last year; and 10 percent in Europe, compared to 9 percent last year.

The European brands will have 82 percent of their capacity in Europe.

For 2008, North American brand occupancy will be up 2 percent from last year, adjusted for capacity, Frank said, with pricing slightly up.

For Q l 08, the European brands will have 38 percent of their capacity in the Caribbean; 22 percent in Europe; and the rest in other regions, he said.

Noted

Carnival's Q2 earnings per share beat the consensus $0.47 by $0.01.

Carnival's guidance of$2.85 to $2.95 compares to last year's earnings of $2.77 per share. The consensus estimate is $3.00.

Using the median numbers for the forecasts, the guidance is for Carnival to post earnings of $0.48 for Q4 compared to $0.51 last year.

The 2008 consensus is $3.38.

The market reacted favorably to Carnival's Q2 earnings, sending the stock up some $0.50 immediately following the call to more than $50. The 12-month target is $54.75.

Trending

Passengers who sailed in Q2 2007 spent an average of $1,190 each on their tickets, compared to $1, 183 for the same quarter last year.

Onboard and other spending was $370 per passenger in Q2 this year, compared to $351.29 last year.

On per-passenger day basis, the per diem ticket price was $157.32 this year, compared to $156.54 last year.

Onboard spending per day was $48.90 this year, compared to $46.50 last year.